Equifax

Finance, lease, subsribe or buy — here’s what you need to before you jump in.

2018 Buick Enclave Premier.

New car leasing is similar to renting a car, but in this case your rental term lasts for two, three or more years. You never own the car you lease and if you end your lease early or exceed the allotted miles, you will pay some costly penalties.

With these things in mind, why would anyone want to lease a new car? For several reasons, including:

1), you want to drive a more expensive car,

2), drive a new car every few years or

3) you simply don’t have much cash to plunk down for a down payment.

If you fall under any of these three reasons, then leasing’s appeal may be strong for you.

Just like buying a car, you should do your research to find the vehicle you want and the best leasing deal possible. Leasing deals are negotiable—you’ll want to put out the least amount of cash up front while limiting your monthly lease payments.

2018 Mazda CX-5 Grand Touring.

1. Know your credit score.

If you have a good credit, then a high credit score should provide you the best leasing deal. Obtain your credit score from at least one of the three credit reporting bureaus — Equifax, TransUnion and Experian — to see where you stand. A score of 700 and higher reflects “good credit management” according to Experian.

2. Choose your car.

Find the type of vehicle you want and narrow your list to about three models, each of which you should test drive. Buy the car you know you’ll be happy with for the next several years. If you settle for something that you’ll tire of quickly, you’ll either be stuck with a car you dislike until the end of the lease term or be forced to pay hundreds, perhaps thousands, of dollars to break your lease.

3. Compare lease deals.

Most leasing plans are offered through your new car dealer, although arranging a lease privately is possible. Avoid being pressured by any dealer offering a “take it or leave it” deal on auto leasing—shop several dealers for the best terms.

4. Negotiate the price first.

Consider not telling the new car sales person that you want to lease your vehicle until after you negotiate your best price. Your lease is based on the final agreed upon price, so try to lower that price to hold down your overall costs and reduce your monthly payments. You can find out what a dealer paid for the car by buying a new car price report from Consumer Reports and using that information to negotiate.

5. Calculate your lease.

Before signing your lease agreement, you must calculate your costs; use a lease calculator such as one found on leaseguide.com. Your negotiated price is your base capitalization cost, which should be lower than the car’s sticker price. Be mindful of other costs including acquisition fees, a luxury tax, state sales tax and lease insurance. Adjust this figure by the amount of money you put down and any trade-in credit. Your dealer has a residual value in mind, which is what the manufacturer determines what your car will be worth at the end of lease term. In addition, leasing companies use a “money factor” or interest rate to determine costs—include that number and your term (months) to determine total lease costs and your monthly payment.

Take Your Time

New car leasing sounds complicated, doesn’t it? That’s why you should take your time to come up with the best deal to find the car you’ll be happy driving for several years. If you rush the process, you’ll pay hundreds, perhaps thousands of dollars more on your lease.

Within the next few days, you will learn that August 2014 auto sales were once again robust. The US market is not yet at its apex, but it certainly is far removed from the dismal 10.4 million vehicle sales of 2009. When the year ends we should find a market with more than 16.5 million units sold.

Subprime Auto Loans

Fueling the sales increase are loans to millions of buyers that might otherwise not afford a new car without some easing of lending rules. These consumers do not have good credit, but their credit may still meet minimal lending requirements. For people with sub-standard credit and in need of a new car, the credit “easing” is certainly a welcome move.

Some media analysts, however, are worried that a subprime auto lending bubble is forming, similar to the housing bubble that caused the market to tumble in 2008, ushering in the Great Recession.

The New York Times Investigates

In July, the New York Times ran an article, “In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates,” where reporters took a look at the “new subprime boom” and shared horror stories of consumers who were qualified for auto loans, but eventually had their cars repossessed when they could not keep up with their payments. It was just one of a handful of stories in the past few months that have indicated an auto loan apocalypse may be imminent.

The alarm has been sounded, but not everyone is in agreement with the warning. Late last month the consumer and commercial data company, Equifax, Inc., issued a statement refuting the notion. In its monthly Economics Trend Commentary, two of its experts — Chief Economist Amy Crews Cutts and Deputy Chief Economist Dennis Carlson — arrived at a much different conclusion.

Equifax Consumer Credit Reports

The Equifax team assembled aggregate data derived from credit reports for more than 210 million consumers in the company’s own database. That information assessed the current state of subprime automotive lending with potential economic benefits considered.

The lending landscape today is not the same as it was in 2007 — both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased, said Dennis Carlson, Deputy Chief Economist, Equifax. In this Commentary, we discuss why we believe that while the subprime lending segment needs to be monitored carefully the evidence at this time does not suggest there is a bubble forming.

Equifax backed up its claim with a seven-page report that chided the press for making rhetorical arguments without supporting those claims with facts. Further, Equifax defended the market, noting that “a fair and functioning “second-chance market” is necessary for a fully functioning economy.”

Without access to a car many people find it difficult to get a job as well as to get to a job. Moreover, a number of people with subprime credit may have lost their jobs and/or their homes during the Great Recession. Subprime lending allows them to get back on their feet and put their hardships behind them.

Loan Originations and Subprime Share

Equifax supported its claims with charts that underscored several important points, including the number of auto loan originations and the subprime share. That share today is more than 5 points lower than it was in 2007, just ahead of the last recession. Equifax measures subprime lending as a credit score under 640 points.

The percentage of auto loans that are at least 60 days past due comes in at just under 3 percent or slightly lower than the pace set in 2006 and 2007, but above the rate during the recession. Moreover, the loan write off rate is still lower than the years leading up to the Great Recession, demonstrating that defaults are under better control today. You can review a portable document file (pdf) of the report here.

The New York Fed Weighs In

Equifax is not alone in refuting stories of a pending subprime auto lending bubble. Earlier in Aug., Bloomberg Businessweek also examined the New York Times’ claims, then cited the findings of four New York Fed economists who had a different viewpoint. The Fed said, “We do not see evidence supporting a disproportionate or unusual volume of new loans being issued to riskier borrowers.”

A follow up blog article by the Fed on Aug. 14, 2014, did note an increase in subprime lending, but also found an increase in prime auto lending. Thus, the subprime share is “less pronounced” and the threat that some people see as looming still has a long way to go from reaching a tipping point.